Medtronic Inc. (MDT), the largest maker of heart-rhythm devices, is in talks to acquire Covidien Plc (COV), a Dublin-based surgical-supply company, for more than $40 billion, a person familiar with the deal said.
Covidien has a market value of $32.5 billion, based on its closing stock price yesterday. The acquisition, which could be announced as soon as June 16, may allow Minneapolis-based Medtronic to move its headquarters to Ireland, thereby reducing its tax rate and giving it access to billions of dollars in cash currently held outside the U.S.
“At its investor day, Medtronic officials specifically said they wouldn’t do a deal just to be structured as an inversion,” said Jason McGorman, an analyst at Bloomberg Industries in Skillman, New Jersey, in a telephone interview. “It would be interesting to see what they say if they do this deal.”
Medical-device companies are banding together to provide a comprehensive set of products and services to hospitals, which are cutting costs as the U.S. Affordable Care Act takes hold. Medtronic and the French drugmaker Sanofi announced earlier today they will work together on ways to make it easier to treat diabetes, one of the fastest-growing medical conditions, as health-care companies try to move into new areas.
Lisa Clemence, a Covidien spokeswoman, and Cindy Resman, a spokeswoman for Medtronic, declined to comment on the deal, which was reported earlier today by The Wall Street Journal.
Covidien fell less than 1 percent to $72.02 yesterday in New York. Medtronic fell less than 1 percent to $60.70. The shares of both companies have risen 5.8 percent this year.
The transaction could be structured as a tax inversion, letting Medtronic move its legal residence to Ireland, the person familiar with the talks said. The 35 percent U.S. corporate tax rate, and the policy of taxing profits made outside of the country after taking into account foreign levies, is spurring such moves. There have been more than a dozen inversions since January 2012, according to data compiled by Bloomberg.
Medtronic sells pacemakers and defibrillators to regulate the heart’s electrical activity, stents to prop open clogged arteries, as well as devices for diabetes and the spine. Covidien makes health-care products including surgical staples, feeding pumps, ventilators and devices to treat plaque buildup.
There isn’t much overlap between the two companies, McGorman said.
“To me it doesn’t fit what they have listed as criteria,” he said. “The opportunity for synergies would be smaller than in typical M&A transactions.”
McGorman said Covidien has a more diverse group of product categories to sell to hospitals, though it’s not a high-growth business.
Medtronic has more than $14 billion of cash, most of it outside the U.S., an issue acknowledged by Chief Executive Officer Omar Ishrak. He has advocated U.S. corporate tax reform that would allow the company to bring the money back into the country without paying such a high tax on it.
Ishrak has said the company wants to expand its offerings globally and in the areas of heart, muscle, skeleton and diabetes products. While he has traditionally said he would be very disciplined with acquisitions, and not enter into deals that would dilute earnings per share, he recently eased those rules.
“There will be times when we will have dilutive earnings per share for whatever reason,” he said at the Goldman Sachs Global Healthcare Conference on June 10. “What that would mean is that we’d have to sell it to our shareholders and make sure that our shareholders understand that this is the right thing to do.”
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